Similarities and Differences between the US GAAP and iGAAP -Two Accounting Systems Dominating in the Global Financial Market – Term Paper Example
Similarities and differences between U.S. GAAP and iGAAP of Introduction The global financial market is dominated by two accounting systems, namely, the United States Generally Accepted Accounting Principles (U.S. GAAP) and the International Generally Accepted Accounting Principles (iGAAP). As the names suggest, US GAAP comprises the guidelines, which are strictly followed by companies in the US, and foreign companies that are listed in US based stock exchanges. On the other hand, iGAAP, which is presently referred as IFRS (International Financial Reporting Standards), comprises standards or accounting principles that are followed by nations worldwide. In the following section, the similarities and dissimilarities between US GAAP and iGAAP with respect to reporting of intangible assets has been discussed elaborately.
Intangible assets are reported under different principles in different countries. For instance, it is reported under SFAS-142 in the US, ASBE-6 in China, AS-26 in India, FRS-10 in UK and IAS-38 as per IFRS. However, in this paper only international GAAP and US GAAP will be compared in context of the subject (Bonham, 2008; Barth, et al., 2012).
Similarities and dissimilarities between iGAAP and US GAAP
Under iGAAP as well as US GAAP, an intangible asset is any identifiable asset that has no physical evidence and is non-monetary or non-financial in nature. Both the accounting system emphasises that an intangible asset should comply with the definition of an asset and is controlled by an entity who is to enjoy future economic benefits of the same. However, the US GAAP and iGAAP agree that an intangible asset can be identifiable only if it can be classified, divided and sold, transferred, rented and licensed and arises from legal or contractual rights (Barth, et al., 2012, Harris, et al., 2013).
Measurement of acquired intangibles
The principles under iGAAP and US GAAP suggest that the value of any separately acquired asset will be considered as equivalent to the fair value of the consideration that has been paid on the date of acquisition (KPMG, 2013; PWC, 2013; Harris, et al., 2013).
Measurement of internally generated intangibles
Under iGAAP and US GAAP, the cost related to internally developed or maintained intangible assets are recognised as an asset. Additionally, intangible assets that are subject to amortisation are calculated at the amortised cost while rest are calculated at historical cost after deducting impairment from respective values. However, iGAAP revaluation of intangible assets is performed regularly based on active market price, which is not followed in US GAAP (KPMG, 2013; PWC, 2013).
Most of the principles under iGAAP and US GAAP regarding amortisation of intangible assets are same. However, the residual life of an asset with limited life is considered zero unless a third party agrees to purchase the same while in US GAAP, any value other than zero is considered as the residual value for tangible assets. Another point of differentiation is that, under iGAAP the method of amortisation is reviewed during every reporting period, which is not followed under US GAAP. Moreover, unlike iGAAP, straight-line method is not implemented in US GAAP when a reliable pattern is not recognised (Ernst & Young, 2011; Deloitte, 2008; Heffes, 2008).
Software development for sale
There is no specific requirement for any software that has been developed for the purpose of sale under iGAAP and the cost incurred is accounted under internally generated intangible assets. However, the US GAAP follows certain regulations in this regard. The cost that has been incurred for developing the software is considered as research and development cost unless technological feasibility is established. Once the same is determined, the cost is considered as software development cost (Ernst & Young, 2011; Deloitte, 2008).
Internal use software
Under iGAAP, no special requirement has been mentioned regarding development of software for internal usage and the cost are considered under internally generated intangible assets unless purchased. On the other hand, there are certain special requirements under US GAAP for software that has been developed for internal purpose. The specifications include different classification of cost at different stages. Cost incurred in preliminary stage is considered as general cost while cost related to application development stage is classified under external direct costs, general administrative cost, payroll cost related to employees and interest incurred during development (KPMG, 2013; PWC, 2013).
Website development cost
Cost related to website development for the purpose of promotion and advertisement is expensed as it is incurred. In context of other websites, expenditures incurred during various stages of development are capitalised and a detailed guidance regarding cost incurred within development phase is provided. However, in US GAAP, detailed guidance is provided only related to cost that has been incurred in application development phase and not otherwise (KPMG, 2013; PWC, 2013; Ernst & Young, 2011; Deloitte, 2008; A Fosbre, Kraft & P Fosbre, 2009).
Presently, a number of discussions and debates are being held worldwide regarding benefits and drawbacks of US GAAP and need of convergence of the same with IFRS. IFRS is modified adaptation of iGAAP so that only one accounting standard is followed at the international level. US GAAP and IFRS have a number similarities as well as dissimilarities with respect to various components of financial statements. In this paper, the similarities and differences has been discussed in context of intangible assets where major dissimilarity was observed in context of website development cost, amortisation and internal use software.
Barth, M. E., Landsman, W. R., Lang, M. & Williams, C. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable? Journal of Accounting and Economics, 54(1), 68-93.
Bonham, M. (2008). International GAAP 2008: generally accepted accounting practice under international financial reporting standards (Vol. 2). New York: John Wiley.
Deloitte. (2008). IFRS and US GAAP-a pocket comparison. Retrieved from http://www.deloitte.com/view/en_us/us/92299342e630e110VgnVCM100000ba42f00aRCRD.htm.
Ernst & Young. (2011). US GAAP versus IFRS The basics. Retrieved from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf.
Fosbre, A.B., Kraft, E.M. & Fosbre, P.B. (2009). The globalisation of accounting standards: IFRS versus US GAAP. Global journal of business research, 3(1), 63-71. (Retrieved from http://web.b.ebscohost.com.ezproxy2.apus.edu/ehost/pdfviewer/pdfviewer?sid=4bd6d447-5ab1-4508-9329-5fa1c30cff46%40sessionmgr111&vid=0&hid=114)
Harris, P., Stahlin, W., Arnold, L.W. & Kinkela, K. (2013). A comprehensive case study: US GAAP conversion to IFRS. Global conference of business and finance proceedings, 8(1), 121-129. (Retrieved from http://web.b.ebscohost.com.ezproxy2.apus.edu/ehost/pdfviewer/pdfviewer?vid=12&sid=b35783ba-8989-415f-980d-3511c6f168a4%40sessionmgr198&hid=114)
Heffes, E.M. (2008). IFRS Section: Definition of Fair Value, One of the Differences between U.S. GAAP and IFRS. Retrieved from http://web.b.ebscohost.com.ezproxy2.apus.edu/ehost/pdfviewer/pdfviewer?sid=a7d42148-306a-446a-81fd-4e50b487949c%40sessionmgr114&vid=1&hid=114.
KPMG. (2013). IFRS compared to US GAAP: An overview. Retrieved from http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-to-US-GAAP-An-overview-O-201311.pdf.
PWC. (2013). IFRS and US GAAP similarities and differences. Retrieved from http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2013.pdf.